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- Consider the following numerical example of the IS-LM model: C = 200 + 0.25YD I = 150 + 0.25Y - 1000iG = 250 T = 200 i = .05 a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) b. The central bank sets an interest rate of 5%. How is that decision represented in the equations? c. What is the level of real money supply when the interest rate is 5%? Use the expression:(M>P) = 2Y - 8000i d. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. e. Now suppose that the central bank cuts the interest rate to 3%. How does this change the LM curve? Solve for Y, I, and C, and describe in words the effects of an expansion-ary monetary policy. What is the new equilibrium value of M/P supply? f. Return to the initial situation in which the interest rate set by the central bank is 5%. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary…Identify the effect of decrease in bank rates on either demand or supply curve and the equilibruim interst rates.Use the Phelps-Friedman model to trace through the effects of a shock involving an increase in the money supply. Graphically illustrate (including an IS-LM figure) and fully explain your work.
- In the model SIM of chapter 3 of the book of Godley, Wynne, and Marc Lavoie. 2012. Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. 2nd ed. 2012 edition., starting from a stationary state simulate the effect of an increase in government expenditure under four variations of the model: a model with simple adaptive expectations Y De = Y D−1, Discuss the trajectory of output from the original stationary state to the new one. G_D is Government goods demand, and theta is Tax rate,Use an ISLM model to analyze the effects of a money supply increase on the interest rate and GDPMoney Surprise Model (25%) Suppose in the Friedman-Lucas money surprise model, there is a negative TFP shock. Neither private sector agents nor the central bank can observe this shock directly. The central bank is committed to interest rate targeting. a- Using labour market diagram, draw the impact of this shock on the labour demand holding the interest rate constant. Provide an explanation. b- Argue that what happened in part (a) will affect the goods market. c- What action the central bank will take? How will this intervention affect the labour supply and goods market? You do not need to draw any diagrams d- Draw diagrams (labour market, goods market, and money market) to illustrate the final stage of the economy after the shock.
- Explain the IS LM model for reduced policy rate in goods and services market and finincal marketConsider the following short-run IS-LM model. Assume the central bank targets the nominal interest rate and expected inflation is zero. C = 300 + .50YD I = 1000 + .10Y – 5000i G = 700 T = 600 M/P = 100 + .25Y - 6250i P = 1 i = .06 Y-T = YD Solve for the IS equation and the LM equation. Find the equilibrium and also show it on a graph of IS-LM. Find the equilibrium values for C, I, and the money supply M. Consider a fiscal stimulus: what is the impact on Y if G rises by 100? What is the impact on I in this case? What is the impact on the interest rate and the money supply? Return to your original analysis. Consider a monetary stimulus where the central bank sets a new target interest rate, i = .04. Find the new equilibrium values for Y, C, and I. Find and discuss any change in the money supply. What causes the change in I in this case? Explain.According to the IS-LM model, what happens in the short run to the interest rate, income, consumption, and investment under the following circumstances? Be sure your answer includes an appropriate graph (hand-drawn). Also, make sure to include a very short qualitative analysis of the policies, showing the chain effects of the variables discussed. Do not overwrite!a. The central bank decreases the money supply - Short-run and Long-run effects (transition from SR to LR) of this policy (Use AD-AS plus IS-LM model for this part)b. A housing market crash that reduces consumer wealth - Short-run and Long-run effects (transition from SR to LR) of this shock (Use AD-AS plus IS-LM model for this part)c. The government increases taxes - Short-run and Long-run effects (transition from SR to LR) of this policy (Use AD-AS plus IS-LM model for this part)d. After the invention of a new high-speed computer chip, many firms decide to upgrade their computer systems - Short-run and Long-run effects…
- (i) Walras’s law is derived from the budget constraints of all the economic agents in the economy. Can Say’s law be similarly derived from budget constraints? Use the relevant constraints and specify the additional assumptions needed for this derivation. Assess the validity of these assumptions.(ii) What are the implications for monetary policy if both Walras’s law and Say’s law are imposed on the IS–LM model? Assess the likely validity of these implications. If they do not seem to be valid, which of these two laws should be discarded? Derive the implications for monetary policy of imposing the remaining law on the IS–LM model.(iii) Do the modern classical or/and new classical schools effectively reinstate Say’s law as one of their component doctrines? Is so, should they state it explicitly? DiscussIn the model SIM of chapter 3 of the book of Godley, Wynne, and Marc Lavoie. 2012. Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. 2nd ed. 2012 edition., starting from a stationary state simulate the effect of an increase in government expenditure under four variations of the model: a model where expected disposable income is always constant and equal to 20: Y De = 20 Discuss the trajectory of output from the original stationary state to the new one.Using the IS-MP framework and assuming there is a temporary one-period consumption boom. Show and explain the initial and subsequent impact of the following policy decisions? i) The Federal Reserve keeps nominal interest rates unchanged. ii) The Federal Reserve adopts a stabilizing monetary policy. iii) In your opinion, explain using an economic argument, which of the above policies is superior.
